On 10 September 2012, the Ministry of Land and Resources of the People’s Republic of China (the “MoLR”), China’s regulatory authority for granting shale gas license, posted on its website a notice of invitation for bids (the “Notice”) for the shale gas exploration licenses, putting twenty blocks on the table for a second bid round. The first bid round took place in June 2011. Foreign investors are now permitted to participate in the bids via Sino-foreign joint ventures that are majority-controlled by Chinese partners.

Background

China is estimated to have the world’s largest shale gas reserves. In recent years, the Chinese Government has been promoting shale gas development with the expectation of diversifying its fuel mix and making itself more self-sufficient in energy. Last year, MoLR separated shale gas from traditional oil and gas and announced it as an independent mineral type. The inaugural shale bid round was held in June last year with four blocks on offer. The second bid round has been expected by the industry ever since the closing of the first bid round and there has been lots of discussion in relation to opening the shale gas licensing to private companies and foreign companies.

The blocks available

The twenty blocks offered in the Notice range in size from more than 300 sq km to 2,300 sq km. Five lie in Guizhou Province, three in Chongqing, five in Hunan Province, two in Hubei Province, one in Jiangxi Province, one in Anhui Province, one in Zhejiang Province and two in Henan Province.

Term of exploration license

The exploration licenses for these blocks will be awarded for a term of three years from the date of the exploration licenses and winners are required to commence exploration within six months of the award.

Requirements for bidders

Both domestic companies and Chinese-controlled foreign joint ventures are permitted to submit bids. Each bidder can only bid for a maximum of two blocks.

To be eligible for bidding, all bidders must: 

  • have a registered capital of at least RMB 300 million (approximately US$ 47 million). They must also be in good financial standing and “capable of independently bearing civil liabilities”.
  • have existing geological survey qualification certificates for oil, gas or other mineral resources or have established cooperation relationships with entities who hold such geological survey qualification certificates. An existing qualification certificate can be used by one bidder only.
  • be independent legal persons incorporated in China (namely domestic companies or Chinese-controlled foreign joint ventures), and cannot bid in the form of a consortium. Please note that a company that has the same management as another company or controls or is controlled by another company is not allowed to bid for a same block.

The deadline for submitting the bids is 25 October 2012. Before submitting the tender documents and bids on that date, bidders must pay a bid bond of RMB 2 million (approximately US$ 313,000) for each block.

Comparison with the first bid round

Compared with first bid round, this bid round appears to have moved on significantly, for example:

  • Foreign investors are invited to participate in the tender process via Sino-foreign joint ventures that are majority-controlled by Chinese partners. This marks a milestone policy change from previous policy that only permitted foreign investors to farm in to a venture and take a minority stake after a Chinese company wins a block. However, given the deadline for submitting bids is only about six weeks from the Notice, a foreign company with no existing joint ventures in China may find it difficult to catch up with this shale license bid round.
  • All eligible companies (including private companies and foreign investors) are invited to submit their bids, which is different from the first bid round where only six SOEs (PetroChina, CNOOC, Sinopec, Shaanxi Yanchang Petroleum, China United Coal Bed Methane and Henan Provincial Coal Seam Gas Development & Utilization) were invited.
  • Twenty blocks are open to the bidders in this round, much more than the four blocks in the first round where only two blocks were awarded as the other two failed to receive the minimum number of bidders. The average area of the offered blocks is smaller than those in the inaugural bid round, which can be viewed as an incentive to attract some Chinese private companies with lower financial and technical capabilities to bid. It is also worth noting that no blocks were offered from certain shale gas rich provinces eg Sichuan, Shanxi and Shaanxi.
  • The requirements for bidding (including the qualification of the bidders) appear clearer than those in the first bid round, and hopefully will provide more certainty for bidders. However, the criteria for bid winner selection are not published.

Conclusion

Although the Chinese Government has yet to develop and finalise legal or environmental regulations relating to shale gas, it is expediting these. On 31 December 2011, the Chinese government approved changing the legal status of shale gas from a type of “natural gas” to an “independent mining resource”. Considering that exploration and exploitation rights of “natural gas” require stringent government approval and so far only very few SOES are awarded with such rights, the above change has been regarded by the market as encouraging the participation by private and foreign companies into shale gas exploration and development in China. However, it remains unclear whether the Chinese government may introduce different fiscal regime for shale gas from the PSC regime for conventional gas in China. With the new shale gas policy, China’s nascent shale-gas industry may provide significant opportunities for foreign investors.